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Questor: Travis Perkins’ makeover is bearing fruit and stamp duty reform would help too. Buy
Questor share tip: the builders’ merchant is getting rid of Wickes, the DIY chain, to focus on better opportunities
Like repainting the bathroom in fetching shades of fuchsia, Questor’s recommendation to buy shares in builders’ merchant Travis Perkins in February 2018 proved to be a bold decision.
Not only did the housing market stay in the doldrums for longer than expected because of Brexit delay but the hoped-for strategic overhaul of the group also took a while to feed through.
Travis had a better 2019 as one of a crop of FTSE 250 stocks to rally on the promise of a brighter outlook for the economy. The shares are now 14pc higher than when Questor last took a look. The question now is whether they are still worth buying amid a bout of corporate do-it-yourself promises to deliver a refashioned company.
Last week Travis finally unbolted its struggling wholesale heating and plumbing business. The £46m disposal, flagged more than a year ago, came after it said in October it would pause the process because of market uncertainty.
Next to be sawn off by the new chief executive, Nick Roberts, is Wickes, whose demerger, due by the end of June, should provide a bigger catalyst for improved group performance.
The DIY market has been a graveyard for great strategic visions. In 2018 Homebase ended up in the hands of turnaround firm Hilco, which paid the princely sum of £1 for the privilege. Revival efforts by Australian acquirer Wesfarmers, which had paid £340m, came to nought. Nor has Kingfisher, owner of B&Q, been exactly thriving.
Wickes is being given a heavy coat of varnish to get the City interested. A little over half of its 235 stores have been updated to a new, fresher format and only 94pc make a profit, suggesting there are more refits and closures to come.
The group is pinning its hopes on the growing “do-it-for-me trend”, which sees lazy homeowners call in the professionals. Its TradePro loyalty programme – which offers a 10pc discount for trade customers – is also faring well.
Travis’s retail division, dominated by Wickes, grew by an underlying 9.7pc in the nine months to September as it gained market share in areas such as kitchens and bathrooms. Despite the strong figures, of interest to shareholders will be how much cash Wickes is sent on its way with to make sure it does not falter for the foreseeable future.
Deutsche Bank, the house broker, says the split will leave Travis 95pc focused on the trade with its eponymous builders’ merchants, plus Benchmarx kitchens and joinery, Toolstation and Tile Giant brands. It will also have far fewer property lease commitments. The building trade is traditionally less cyclical than retail.
Without Wickes, Travis should have more leeway to invest in the best performing parts of the business. That means Toolstation, the star division, which is snapping at the heels of Kingfisher’s Screwfix.
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With 370 branches, it is forecast to have grown sales by 15.4pc last year and the company has acquired control of the business in the rest of Europe with a view to mounting a rollout.
Analysts at Jefferies, the bank, think that overall trading in the fourth quarter of 2019 was the slowest of the year, coming in at 1.8pc, compared with 4.7pc in the first nine months, after the wider market for building materials distribution softened over summer. Full-year results are due on March 3.
Another thing to note is that Travis would be a key beneficiary of stamp duty reform, should measures emerge in the Budget on March 11. Boris Johnson has floated the idea of lifting the threshold to £500,000 and cutting the top rate to 7pc and Sajid Javid, the Chancellor, has made clear he would like to reform the tax too.
In the meantime, the market is looking brighter as house prices rose by 2.2pc in the year to November; an acceleration. Travis Perkins shares trade on an undemanding 14 times this year’s earnings. There is more to gain from this renovation.
Questor says: buy
Ticker: TPK
Share price at close: £16.61
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